How much should a healthy person’s health insurance premiums reflect the cost of another person’s poor health status? Stated another way, how much should society invest in care for the sickest individuals? Moreover, should society invest in primary care or inpatient care?

This is a bigger question than most people realize. Currently, 20 percent of the U.S. population accounts for 80 percent of all medical spending. It gets worse: the sickest 10 percent account for two thirds of medical spending; 5 percent accounts for half of spending while the sickest 1 percent accounts for nearly one-quarter. In other words if you want your premiums to fall by two-thirds just kick the least healthy 10 percent off your health plan. By contrast, the healthiest 50 percent of the population has few if any medical bills during a given year. You want them in your health plan.

What should be the role of health coverage in our society? Some believe health coverage should function as insurance to manage unforeseen health risks. If you’re old and sick, you pay more; if you’re young and healthy, you pay less. Others believe the healthy and sick should all pay the same (high) premium so sick people get medical care at a bargain. Sometimes this is done through socialized national health systems, like found in Britain and Canada. national health systems use a hefty dose of progressive taxation to fund health care. Obamacare was an attempt to achieve some of the goals of socialized medicine but through private insurance.

Bargain Basement Health Care. Under the national health system (political) model, everyone is guaranteed access to primary care, but typically less emphasis is placed on the sickest patients. The British National Health Service model makes access to primary care easy, but access to specialized care is more problematic. Access to care can depend on where you live. Patients in need of surgeries or other procedures often face long waits for care. Some of the regional British health authorities run out of lifesaving medications for cancer before the year is out. This practice of saving money by skimping on high priced medications is called the post code lottery by the British. Conditions are similar in Canada: primary care is easy to get, but there are waiting lists for many diagnostic tests and specialist consultations. The queues vary in length depending on which province you reside in.

That is a common characteristic of national health care systems: medicine becomes a political tool to maximize votes. Rational politicians want to spread public resources as broadly as possible. Applying this theory suggests politicians should give the healthiest 80 percent of the population easy access to primary care, rather than expend too many resources on the sickest 5 percent — who consume half of medical expenditures. Many of the healthiest 80 percent of citizens probably vote; the sickest 5 or 10 percent may be too sick to vote.

Numerous countries claim some level of universal coverage. This includes countries in Latin America, Central Europe, Asia Minor and elsewhere. Under this bargain basement model, most care is theoretically free but you may have to wait in line at the clinic for hours; hospitals are overcrowded and the accommodations substandard. Anyone who really has the means buys supplemental coverage so they can access private physicians and private hospitals.

Sky is the Limit Health Care. The polar opposite in a health care system is where the public is expected to pay for most of their primary care out of pocket — and then shell out thousands more to underwrite the extremely costly people with dread diseases. Under this model, no care should be withheld no matter how small the probability of improvement; no cost is too much for society to refuse.

Obamacare took us farther in the direction of the sky is the limit. The Affordable Care Act (ACA) banned both annual and lifetime caps on benefits, which removed any limits on what the sickest patients could demand from their fellow Americans. Specialty drugs that cost $1,500 per month and orphan drugs that run $160,000 per year are another example of extreme medicine.

The ACA is failing because it allows anyone to sign up for coverage regardless of health status. Yet enrollees pay the same premiums as healthier people. This means healthy people have to pay far more than they would otherwise pay if premiums were based on their expected health risk alone. Healthy folks don’t generally like paying premiums that are the size of car payments when they only anticipate seeing a doctor once during the year. That’s why there’s an individual mandate. Without a mandate, healthy folks would drop coverage, destabilizing the insurance pool. Premiums would rise for all who remain, until a fresh round of semi-healthy dropouts drove premiums even higher.

Conclusion. These examples illustrate the extremes between doing the most good for the most people (with the least money), and forcing the many to sacrifice for the few. The problem is with either of these two extremes: people aren’t allowed to make any choices about their preferences. Surely there is a happy medium between the bargain basement socialized medicine model and the Obamacare the sky is the limit model. The sooner we realize that the better we will be financially.

Comments (84)

“How much should a healthy person’s health insurance premiums reflect the cost of another person’s poor health status? ”

Not at all. Risk and market-based health insurance is based upon acturaial risk mixed with fudge factors so that the insurer makes a profit. There are other ways of helping the sick than increasing premiums that destroy the marketplace.

Allan, you are a very intelligent commentator but, in this case, I think you’re off the mark. Because insurance of any kind is inherently sharing of risks – i.e., sharing of costs.

The fundamental error to divide people between healthy and unhealthy. I know you know that. I know you know that people are distributed along a continuum ranging from excellent health to poor health. As are the corresponding costs for their own medical care. And I think that means people who can afford to pay their own medical costs wouldn’t buy insurance and those who cannot afford it, would be left out. I don’t believe Americans want a system that leaves people out when it comes to their medical care,

So the objective of universal access to medical care seems clear to me. The problem is how to accomplish it. Between the thought and the action falls the shadow.

My opinion? I believe Americans have a social duty to chip in toward the medical costs of Americans who cannot afford it. Whether that takes the form of taxation or “insurance premiums” is of course debatable. Note: I do not believe that solves our medical delivery cost problem – any more than I believe taking aspirin cures a bad headache. But it’s a necessary social duty that will continue even if a solution to the medical cost oroblem is achieved (which I doubt).

As with so many other problems of governance the problems are not so much directional as practical. I think we generally agree on the directional; where we might disagree is how we get there – and how to pay for it.

Nothing will change unless we can apply a strategy to solve the efficiency and effectiveness of our nation’s healthcare. Meanwhile, as compared to the other developed nations of the world our nation’s maternal mortality ratio ranks 45th worst among these developed nations reflecting the quality of our healthcare for 50% of our citizens. And, we would need to reduce the portion of our national economy devoted to our healthcare by . 33% . to have the same level of efficiency achieved by the other developed nations of the world. The excess cost was $800 Billion in 2015 (the equivalent of fighting 8 Iraqi wars in 2005 simultaneously).
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No matter how we arrange to pay for healthcare, we will need to change the context of this healthcare. The over-all level of Paradigm Paralysis afflicting our healthcare industry is profound. There is absolutely NO current strategy for healthcare reform that will fix our nation’s healthcare. Thus, more than 400 women will continue to die annually related to a pregnancy because they live in the wrong nation, and the excess cost of healthcare will continue to be the largest contributor to the annual Federal deficit.
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I continue to believe that the only effective strategy for achieving a Paradigm Shift within our nation’s healthcare should use the ‘Design Principles’ that have been defined for managing a common-pool resource. The concepts have evolved through rigorous research involving many experts. The most commonly recognized expert is Nobel Prize winner Elinor Ostrom.
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See https://nationalhealthusa.net/home/rationale/
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for one alternative, community by community.

“unless we can apply a strategy to solve the efficiency and effectiveness of our nation’s healthcare.”

Paul, I think you mean our nation’s medical care, and with that change, I agree with what you say. But that is not mere semantics, it’s important. “Healthcare” is a separate (and related) issue but the the attention is on medical care because of its cost. The cost of medical care is the problem. In contrast healthcare is free – or so nearly free that its cost is not an obstacle in taking care of one’s health.

I think if our policy and thought leaders don’t get the words right, we’re likely end up with yet another Obamacare – a “health insurance” mechanism bolted onto a medical delivery cost problem. Maybe there’s no solution to that problem. But if a solution can be devised, shouldn’t we first be careful to identify the problem correctly? That was not done with Obamacare with predictable results; and Paul Ryan doesn’t seem to be doing any different with his whatever-it-is.

“If language is not correct, then what is said is not what is meant; if what is said is not what is meant, then what must be done remains undone; if what must be done remains undone, justice goes astray; if justice goes astray, the people will stand about in helpless confusion. Hence there must be no arbitrariness in what is said. This matters above everything.”’ –Confucius, about 2500 years ago.

Allen I think government single-payer medical welfare is exactly where the U.S. is heading.

I think that because every private endeavor has failed over the last 70 years either (1) to reduce or even stabilize medical delivery costs or (perhaps more importantly) (2) to build a convincing case before the American public that we are getting our money’s worth from the medical care we receive.

I include government in all that failure – but government always seems to proceed as if more government will be the pill that cures every disease.

And believe me, I don’t like it any more than you do. But I am starting to believe it’s inevitable.

Allan, employer-based benefits is over, like the Titanic it can’t be saved. We are headed for a great big dose of FREE and OPEN MARKETS.

President Trump will need to be placed on Mt Rushmore for making America Great Again. We are going to get Democratic Senators voting for Obamacare Replacement then everyone will know we have an effective leader in the White House, finally.

Paul, nothing will change until we stop using abstract numbers (ranked 45th) and start looking at the real numbers along with cause and effect. We need to rid ourselves of our ideologies and recognize history and what capitalism and the free market place brought to the world.

We need jobs and accountability. Drugs are killing Americans and that includes pregnant woman and their soon to be born children. Your 45th in rank does nothing to solve that problem. We need jobs and appropriate education, not political education by those that are in power in the education field. We need to develop new technologies to provide those jobs to maintain a high standard of living and high wages.

John, of course it is, but it is voluntary and the deal is between the buyer and the seller or their appointed agents. The insured should recognize that there is pooling involved. However, in healthcare, due to a government that is rapidly taking over the healthcare sector, people don’t understand what classical insurance is and think it is pre paid medical care.

“The fundamental error to divide people between healthy and unhealthy.”

What many wish to do causes death spirals and inequality under the law along with reducing innovation, access, and quality. That eventually raises overall costs. The American system has already created safety nets to satisfy our desire to help those needing help the most. It also has created a single payer atmosphere with Medicare. Solve the ever increasing cost problems in Medicare along with the other elements mentioned and you might have something to talk about. Unfortunately those pushing single payer only talk about how bad things are today and how good they will be in their dreams. They should start dreaming about the VA nightmare which is completely under federal control.

There is more to this dilemma than meets the eye. Shifting our focus so far into the healthcare sector reduces our ability to create wealth and to create a better society because so much of our human capital and capital wealth could better be used elsewhere.

“I believe Americans have a social duty to chip in toward the medical costs of Americans”

Where is that written in the Constitution? Pass an amendment and then I will support you in your endeavor to make your plans better, but I would fight such an amendment until passage because you have no right to involve yourself in my personal care. Additionally you have no right to create obligations for other individuals. If I don’t like broccoli you should not force me to buy it just because we have to share with the poor broccoli farmers.

Let me suggest a history book for you called New Deal or Raw Deal by Burton Folsom. It is a fast read, at times funny and very interesting. It has more to do with broccoli than healthcare though I don’t remember him spending much time on either if any at all. It will provide you another view so that you either modify your personal views or become better able to more strongly defend your views.

Allan, you responded “Not at all” to the question “How much should a healthy person’s health insurance premiums reflect the cost of another person’s poor health status?”

I said that’s off the mark because insurance of any kind is inherently a pooling, or spreading of risks. It is impossible to spread risk without spreading the attendant costs. Spreading costs means some people in the pool will pay some of the costs of others in the pool. This is accomplished thru premiums.

Some suggest that “sharing” risk is a fallacy because the insurance company does not share risk. Nevertheless risk-sharing – and therefore cost-sharing – is present in any insurance arrangement.

What is not present is the insurance company taking risks – and I think this fact leads to confusion. Yes, the people in the pool share the entire, overall risk, not the insurer. The insurer facilitates the risk sharing but doesn’t participate in it – at least, not intentionally. In a sense, the insurer acts as a bookie who needs to balance his book – i.e., cover enough people in the pool to give reasonable assurance that premiums paid by the generally healthier people will offset the excess costs of the generally less-healthy. When successful at that, the insurer collects enough premium to cover the overall costs – and leave a vig for the insurer.

But confusion arises when people believe the insurance company is somehow sharing in the risk. That’s not what insurers do. Occasionally an insurer will suffer a financial loss but at least in medical insurance that’s inadvertent, and does not alter the bigger picture – that insurance companies’ business model is to facilitate the sharing of risk but not to share it. You and I share the risk. Which means we are paying for some part of other peoples medical expenses – or other people are paying a part of ours – by paying our premiums.

The actuarial risk in the premiums is essentially a sophisticated average. It’s calculated from the actual utilization experience in pools of similarly-insured, similarly-situated people. It’s a complex exercise to calculate these averages which is a job for actuaries. The actuarial averages are then assigned to each individual in the pool – but they remain averages; they do not reflect the “true risk” for any individual; and they still include a share of others’ cost, spread across the entire spectrum of health status for individuals covered in the pools.

Risk factors are assigned this way because it’s not possible to know the true risk for any individual. To paraphrase something you’ve said, actuaries are very good at mathematics – but they’re not gods.

One more thing – “you have no right to involve yourself in my personal care”

I agree. I don’t see how I’m doing that.

Anyway, you and I still absolutely agree that voluntary exchange lies at the heart of any functioning economy. Everything springs from that.

Obamacare got rid of agents in favor of navigators because agents are not worth the expense. Anyone can pick out a plan on their own. Now I am being compared to a runner for bookies. Sigh…..thanks for helping me out with my self esteem issues.

Let’s throw the agents to the alligators. They will eat them so they grow big and we can eat the alligator.

The problem is that after the alligator is eaten we don’t have the intermediaries needed in the insurance world. Maybe the computer will replace the need for agents, but not now and probably not for quite awhile. In a competitive market agents might become more necessary and act to level out information asymmetry. I’ll let the marketplace decide whether we should throw you to the alligators or keep you.

““How much should a healthy person’s health insurance premiums reflect the cost of another person’s poor health status?””

John, risk based insurance doesn’t reflect the cost of another person’s poor health status. That is because the insurer is insuring risk. That one person in the pool might not have been charged enough to meet his risk is another story, but we rely upon the insurer to create the premium. Why would the insurer want to insure someone who is ill at a lower cost? That would make the insurer non competitive.

As I said before trying to underwrite for every eventuality cost more money than it saves so the pooling mechanism will create some winners and some losers. Freedom to choose one’s own insurance will lead to competition to get as close as possible to the real risk without spending too much money.

The insurer that decides it appropriate to have the healthy pay for the sick will undergo a death spiral.

The insurer certainly takes risks and will go bankrupt if its risks are not properly distributed. I don’t know where you get the idea the insurer doesn’t carry risk. It bought that risk from the insured.

“You and I share the risk.”

No, you and I exchange risk for money.

““true risk””

As I have said many times the insurers use fudge factors and even zip codes to permit them to determine premiums. They are doing the best they can to approximate the risk coming from the pool while trying not to create a scenario where the healthy leave the pool because their rates are paying for the sick.

““you have no right to involve yourself in my personal care”
I agree. I don’t see how I’m doing that.”

Interestingly, CMS payments to Medicare Advantage insurers are based on a combination of how much the insurer bid in each county where it offers policies and the individual member’s risk score. The problem is that the risk scoring state of the art isn’t anywhere near where it needs to be. It’s partly claims based which means there is a delay between incurring claims and getting those claims factored into the risk score. Also, MA insurers engage in upcoding to the extent that they can in order to justify higher risk scores. So, risk scoring at the individual level makes sense conceptually but it’s not so easy to do it accurately and it creates opportunity for gaming by insurers.

“As I have said many times the insurers use fudge factors and even zip codes to permit them to determine premiums. They are doing the best they can to approximate the risk coming from the pool while trying not to create a scenario where the healthy leave the pool because their rates are paying for the sick”

Sorry, Allan. No comprende. Fudge factors on what? Zip codes that do what? Approximating the risk coming from the pool meaning what exactly? How do “fudge factors” and “zip codes” even do that? You have been insistent on your views – i really wish you would explain more concretely because I don’t understand it.

John, it would be too expensive to risk adjust every conceivable cost factor an individual might have. Therefore insurers don’t do that and use other metrics, perhaps not as exacting, to develop a premium. This might mean that a healthier person and a sick person might both pay the same premium, but in the end all of these decisions balance out.

If the insurer is too sloppy the purchasers might take note that they are paying too much of a premium and find another insurer.

Allan, you’ve reached the heart of the matter: “This might mean that a healthier person and a sick person might both pay the same premium, but in the end all of these decisions balance out.”

Exactly They balance out because in determining the same premium for everyone, the risks – and the costs – have been combined and spread among everyone. Accordingly when insureds pay their premiums, some are helping pay a portion of others’ costs, and some have others help pay a portion of their costs.

There is a difference between saving money by not investigating every detail and the intention of redistribution what you were suggesting earlier though I don’t think you believe in it. Add to that voluntary insurance and you have an Adam Smith model not at all similar to a socialistic model.

The premiums are based upon risk of loss to the insurer. That doesn’t mean that they cannot be based upon other things as well since it is impossible to adequately determine risk in singular individuals.

The conundrum is worsened by EMTALA that Congress passed in 1986. It requires a hospital’s Emergency Department to offer stabilizing healthcare to anyone regardless of their financial status. Also, if the person’s needs require services in another hospital, a physician needs to verify and assume responsibility for arranging this verification that the other hospital will accept the transfer along with an agreement by another physician to assume responsibility for this care. For persons without insurance, this is an incredible problem. In fact, there are a small number of hospitals that do not have an Emergency Department as a means avoid this problem. Also, there have been a few hospitals that do not accept Medicare insurance. The political capital involved is absolutely unimaginable.

The reduction of universal health insurance will ultimately produce a heavy burden on hospitals because of the increasing level uncompensated healthcare. The healthcare industry has a huge vested interest in preventing that problem. The biggest problem in the belt-way is the amount of money that is spent on managing the various vested interests, i.e., political capital.

Eventually, the reduced funding of the Medicaid expansion will lead to a decreased number of total insured citizens. Another unfunded mandate for the States occurs with the small level of Federal funds available for any state’s catastrophic risk pool.

Paul, I guess some of the states will have to tighten their budgets. That might mean that Medicaid will be utilized appropriately for those Americans that do the best they can and need help. We don’t know, but I presume that in certain states a lot of Medicaid goes to illegal aliens. That is not what Medicaid was intended for.

Devon – Your data about what percentage of healthcare costs are attributable to the sickest 1%, 5%. 10%, etc. is for a given year as I’m sure you know. Members of this group are not the same people from one year to the next. For example, in the 17 years since my 1999 quintuple CABG, I had three expensive years, including 1999, and 14 inexpensive years. Relatively few people have high healthcare costs every year though some do, especially those who need expensive specialty drugs indefinitely. People are healthy until they aren’t. Life is unpredictable.

I think there is a middle ground between your two choices that I would call common sense care. Common sense care would probably allow underwriting so the majority of people who are healthy can buy a health insurance plan for a premium that more or less reflects their own low actuarial risk. At the same time, the broad middle class, upper middle class and the wealthy would pay incremental taxes to adequately fund high risk pools that actually work for the people who need them and also provide subsidies for those who can’t afford health insurance even if they’re healthy enough to pass medical underwriting with or without a rate-up. Nobody would pay more than 10% of pretax income toward the cost of their health insurance premium under common sense care.

As to the “Do everything” mentality regardless of how expensive or futile, I think all health insurance plans should include a default provision that would authorize physicians to apply common sense depending on circumstances. People who want to preserve a right to “do everything” care should pay a substantial incremental surcharge above the common sense plan premium and that surcharge will not be eligible for subsidies.

One aspect of the culture in the more socialized countries of Western Europe, Canada, Australia, Japan, etc. that I admire and respect is that they don’t think it’s right to impose unreasonable costs and expectations on their fellow citizens. I think Americans should think more like that when it comes to futile or marginally useful but very expensive end of life care. Of course, if people are prepared to spend their own money for expensive futile care, that’s their prerogative.

Barry, I have an idea. You are a numbers guy and probably have all your old records along with a lot of time due to retirement.

Since you have had major medical problems that we all carry insurance for perhaps you would like to add up all your premiums over the years along with all the expenses paid by your insurers and divide them up to get an annual average cost skipping any extra premiums you pay because of your economic status or any other special status or items such as part D or gap insurance. I believe your costs should be significantly above average for your age. You could do that for the Medicare years understanding that you didn’t go under Medicare as a normal low risk individual. You could do that for the 17 years as well, and longer if you have the records.

Let us see if you got your money’s worth. For premiums under Medicare we would have to use the average annual premium for NJ and possibly for the US.

I note that you might be taking my suggestion or at least moving in that direction which is to separate the cost of subsidies from the premiums. That is a good step but you still have a long way to go.

“that would authorize physicians to apply common sense depending on circumstances.”

It is interesting how you say the 1%, 5% and 10% are different from year to year. I’ve hear that before. I wonder to what degree the overlap is.

I’ve said I do not believe Single-Payer would work in the US like it does in Canada partly because the US lacks the will to enforce monopsony pricing. However, another reason it would not work here is because Americans have this unique idea that the sky should be the limit when it comes to their medical needs. I agree there should be some limit to the therapies that have little likelihood of success.

Devon – A number of years back I saw a study of Medicare patients ranked by total spending over a one year and a five year period. If I remember correctly, it showed that in the first year, the sickest 5% of Medicare members accounted for 41% of total Medicare costs for that year which is somewhat lower than the 50% figure we normally hear about in commercially insured populations which could possibly be attributed to some of the hugely expensive cases involving premature low birthweight babies which are not a factor in the Medicare population.

The more interesting part was when they ranked members by cumulative spending over a five year period, the sickest 5% only accounted for 27% of total program costs over five years. That’s because that some members died along the way while others had an expensive episode like heart surgery and then recovered. A number of my former colleagues had expensive health years due to a surgical procedure but then recovered and the following years were uneventful and relatively cheap from a medical cost standpoint. I’ve described my own experience in considerable detail.

Another interesting study was done looking at the dual-eligible population or those people eligible for both Medicare and Medicaid. It looked at the highest cost 10% for each program. Very little overlap was found. The reason is that the expensive Medicare folks had conditions like CHF or needed Kidney dialysis or an organ transplant while the most expensive Medicaid folks needed lots of long term care or had serious mental illness and were frequent visitors to hospital ER’s.

While I don’t have precise data, I’m pretty sure that only a very small percentage of the population has high healthcare costs every year. Expensive specialty drugs to treat rare conditions are expensive, in part, because the population that needs the drugs is small. To qualify as an orphan drug, the population that needs the drug can’t exceed 200,000 in the U.S. and is usually far less. At the same time, an expensive drug like Sovaldi or Harvoni to treat Hepatitis C only requires a 12 week course of treatment and that’s the end of it. Cancer treatments are also of limited duration. You get the idea.

Barry that’s interesting. I still recall seeing a bit of surprising data from our Medicare business (I was with a big Blue Plan then).

The data showed total pmpm Medicare medical cost was highest for the years right after age 65; it sloped down and then steadied before rising sharply after age 80. I wondered whether this data were unique to us, or unique to a particular period of time at the Plan, or a fluke, or something that is replicated at other time periods for other insurers.

I have no way of recovering that Blues data and, even if I did, it’s going on 20 years ago.

John — I’ve often heard that there is a pent-up demand factor that influences Medicare spending among those who age into the program so first year spending and maybe the next couple of years might be higher than predicted. Even working folks with ESI coverage, especially men, might be reluctant to go to the doctor for a variety of reasons including time away from work but become more willing to go once they retire especially if their spouse pushes them to go. That’s all just pure speculation on my part though. I have no data. I asked a couple of the large insurers about it but they don’t know definitively either.

I would add that two types of surgeries I can think of that lend themselves to postponing, at least for a while, are orthopedic procedures like hip and knee replacements and weight loss procedures like gastric bypass, lap band and gastric sleeve. All are expensive and entail significant recovery times but are not immediately life threatening like the need for heart surgery or aggressive cancer treatment often is. Preventive screening tests, which can also uncover problems in asymptomatic people are also postponed until retirement when more time is available and Medicare will pay for them.

Funny, but back in the early days of HMO’s and probably true to a lesser extent today patients would leave their Medicare HMO’s and go on traditional Medicare to get those two procedures. When they were well again many returned to the HMO. The traditional Medicare program was blamed for higher than expected costs.

Allan – I have some of that information but by no means all and I don’t know precisely how much my ESI cost though I think I can make a reasonable estimate.

Specifically, I have data for my services, tests and procedures from 1999-2009 which includes two of my three expensive cardiac care years. It also includes two other years when I had non-cardiac surgical procedures, both done on an outpatient basis. It does not include my drug costs but I was on Plavix during that period and it was still patent protected and cost about $2,200 per year.

Anyway, total medical costs, excluding drugs, from 1999-2009 was approximately $118K for myself and $13K for my wife. That’s at insurance company contract reimbursement rates, not list price. Drug spending was probably another $30K most of which was for Plavix. I don’t remember what my out-of-pocket share was but our deductibles were quite low during that time. I estimate the total insurance premium for the two of us, including my modest contribution toward the premium, was $9K per year on average or $99K for 11 years for the two of us.

I have not tracked this data while on Medicare, mainly because the Medicare EOB’s are inconsistent at providing CPT-4 codes for each service, test or procedure and the breakdown of hospital based care is not very good either. Total drug spending for the five years that I’ve been on Medicare is about $8,600 for me and $750 or so for my wife including our copays which have varied quite a lot from one year to the next as the insurer makes changes in both tiers and copay amounts for each tier. I estimate my total Part A and Part B bills at Medicare rates are probably between $60K and $65K. My wife’s are probably well under $10K and maybe closer to $5K. Our supplemental plan pays what Medicare doesn’t pay. We have been subject to the IRMAA surcharge during the whole time but the tier level varied from one year to the next.

For 2017, our all-in health care premium for standard Part B, stand-alone Part D, IRMAA surcharge on Part B and Part D plus our supplemental plan is about $19K for the two of us. The current per capita cost for the Medicare program is approximately $12K.

So what conclusion do you draw from all this?

Separately, with respect to applying common sense in an end of life situation, why can’t doctors just say I’m sorry but there is nothing more than we can do rather than offer options that are both futile and expensive?

Barry, I was hoping with your experience you could draw some conclusions, but I see your data is incomplete. How much higher or lower do you think your individual and combined premiums were over the years compared to what you think was spent by the insurer’s for your care (Excluding Part D). If this answer is possible were you a winner or a loser and by what percentage (separately and combined with your wife) would you guess?

From 1999-2009 with high medical expenses you averaged $11,800 and your wife averaged $1,300. Considering the premiums and deductibles we are seeing with the young today it seems like insurance isn’t worth it.

“why can’t doctors just say I’m sorry but there is nothing more than we can do”

I think that is done in most cases. I am probably more persistent than most and even had to call in a consult because I felt the family had a right to ask for the plug to be pulled. Unfortuantely I had certain semi religious reasons I couldn’t do it, but I couldn’t let my semi religious reasons interfere with the family from doing what they thought was right.

The big problem is we seldom know when the end has come and when I see the end I try and permit things to go as fast and comfortably as possible. We are wrong too often so the high numbers that should have been permitted to die are not known until after the fact.

However, the patient or his agent in my book has veto power over my opinion. But, under normal circumstances people pay for that right. In healthcare they don’t so as written in one of the journals 30 years ago, an elderly man who had over a hundred thousand dollars in care paid by Medicare surprised everyone and actually survived. The problem was that his false teeth had to be adjusted. That was the first time the family questioned the cost. The bill was $50 for a dentist that is not covered by Medicare and the family refused his visit because they refused to be responsible for the bill.

Allan – Actually 1999-2009 is an 11 year period, not 10. Anyway, I worked for my last employer for slightly over 18 years so call it from 1994-2011 inclusive. From 1994-1999, I was basically healthy except for one minor outpatient surgery and a couple of colonoscopies. My son was covered under that employer’s plan for the first six years I worked there until he graduated from college and entered the workforce.

Over the 18 year span, I estimate my healthcare claims, including modest out-of-pocket costs, were between $160K and $180K. My wife and son combined were probably no more than $15-$20K at most. So, for the family, I would peg total healthcare claims at $175K-$200K, 90% of which were mine. I’m guessing total premiums, including my modest pretax contribution, amounted to $165K-$170K. So the family medical cost ratio was a bit over 100% producing a modest loss for the insurer / self-funded employer plus the associated administrative costs.

My working life prior to that from late 1971 to the end of 1993 was a healthy period for us except that my son had asthma which he started to grow out of as he entered his late teens. Despite a few visits to the ER, medical costs were modest. Premiums far exceeded medical claims during this period.

What we can conclude from all this I’m not sure except that most families would not be able to afford to pay for the high cost years out-of-pocket even at insurer contract rates as opposed to the absurdly high list prices charged by hospitals. I didn’t expect to develop heart disease or the other issues I had to deal with along the way. That’s what insurance is for.

I don’t expect health insurance to pay for the equivalent of oil changes and tires though some people can more easily afford high deductibles than others. One low birthweight premature baby with serious complications could easily rack up bills totaling 5-10 times what my bills amounted to over the last 18 years of my career. People who were lucky enough to never have any serious health issues don’t seem to get this. They think insurance is either unnecessary or, at best, a poor value. Life is unpredictable and what can happen medically is unknowable no matter how well one tries to take care of himself or herself.

As for Medicare claims, my wife and I combined have probably incurred total claims somewhat less than average per capita Medicare program costs over the five years that we have been eligible for the program. My claims are slightly above the average per capita costs and hers are far below them. We pay a lot of money for our insurance and I hope our supplemental insurer continues to make money from our premiums. This is one product we don’t want to get our money’s worth from in the form of high medical claims!!!

OK, 11 years. Does this character – mean to or through? I get the word ‘inclusive’ which makes things clearer.

I am looking at your numbers and there seems to be a gap between what the insurance should have cost (you were the rare hi-cost item) and what it actually costs. That gap I presume is pure waste going down the toilet. You were a known high risk and for every known high risk there are countless numbers of healthy (more than the healthy in your family) that include a few unknown risks. Remember people die of all sorts of things that don’t cost the insurer a dime. That the numbers were nearly even demonstrate the above gap.

But, how do insurers make money? They make it off your premium, but they also make it off the float as your money is invested bringing in a return. If we looked at the earnings off your premiums for all those years you weren’t sick that would probably push the numbers in the favor of the insurer even with your tiny pool having an unexpected expensive outlier. The same is true in the reverse when HSA’s are used. In that scenario you become a partial insurer and reap the interest of the premium saved.

Overall. even in your case as an expensive outlier had no insurance been involved and all the insurance money was banked into an HSA type devise I think you would have been left with a lot of money.

If we took another group similar to yours, but one that was not responsible and did the same thing we might have found that they ran out of money even if their outlier didn’t cause the high costs you caused. Our present policies encourage this latter group.

My analysis might be totally wrong, but I wanted you to look at it in this fashion. You are much better at these types of numbers than I since I presume you worked with them almost your entire life. What I am trying to show is a large gap between the two personality types. That gap can be closed, not by physicians, but by the patient himself. I don’t want to take money from a hard working responsible family and give it to the irresponsible. That is one of the major cost problems that must be controlled. That is one of the areas where you and I butt heads.

“they also make it off the float as your money is invested bringing in a return. ”

Allan this is a minor issue in the grand scheme of things but it still pops up occasionally. I was a senior underwriting officer at three major insurers; in most of my experience, the return on medical insurance float was simply not a meaningful part of premiums – well under 0.5%. It’s even less now. Belief to the contrary has seemingly become urban legend.

1. Keep in mind first that state insurance departments require insurers to reflect their investment returns as reductions to their premiums.

2. Those returns were historically a very minor part of premiums. For a while – back in the late-70’s, early 80’s – interest rates were high enough that returns on an insurer’s “net investable funds” might be worth maybe 2% of premiums. Those days are long gone.

3. It’s important to know that insurers figure their net investable funds by counting all income, less medical expense and operations cost. Other than HSA or HRA accounts, the insurer does not manage separate investment accounts for any individual’s net investable funds not even Barry’s. It’s done in total.

4. As newer technology is put in place (e.g., automated billing; automated adjudication) it reduces the time from the medical service date, to the date insurance reimbursement takes place. In the past 90 days was typical; now 70-75 days and sometimes less is typical. This shrinks the insurers’ net investable funds, meaning their impact on premiums has also shrunk.

5. Don’t forget whatever gross return the insurer obtains, is taxed by the feds and the states before it is credited to reduce the premiums.

The margin of profit for insurering is not that high. If it is 5% then .5 is 10%. As the insurer float grows that is large profits for just holding the premiums. I am not sure how much this varies with different types of insurance and of course I don’t know the profit margin of insurers.

From Warren Buffet: “Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. …” He thinks it is a lot of money for Berkshire.

You will note that Berkshire Hathaway’s vast insurance business has exactly zero exposure to health insurance. One of the reasons is that pretty much all the money that comes in from premiums goes out during the coverage year. Most people are paying their premiums monthly as opposed to up front at the start of the year which leaves even less money to invest before claims are paid. The bottom line is that float is a minimal factor in the health insurance business and since 2008, short term interest rates have been close to zero anyway. You’re barking up the wrong tree here.

Barry, I know and that is why I invested in Berkshire A’s and B’s. He also knows how to maintain profits without being taxed, without paying too much and by improving companies or buying companies with a lot of growth. He invested in Israeli companies.

The present investment return on insurers’ medical insurance net investable funds is is well below 0.5% of premiums – I previously summarized the reasons. Also it reduces premiums, it’s not a charge.

Float has not been growing as a (%) of premiums, it’s gradually shrinking.

I’m curious when Buffet made the statement you reference, and whether he was talking about medical insurance. Do you happen to know? What he says sounds more like property/casualty insurance of many years ago.

I know a whole lot about group medical, and a fair amount but somewhat less about individual.

For a few years, I managed a self-funded employer plan that covered around 20,000 individuals, and whose combined total overhead charged by our two administrators was about 4.8% of “premium-equivalents” (necessary to know those even in a self-funded plan, because COBRA premiums as well as our employee payroll contributions were based on them). That 4.8% included the administrators’ profit margin as well as their charges for admin.

John, Barry said Buffett didn’t invest in health insurance and in this instance I will trust Barry’s word along with the fact that health insurance is paid monthly. Barry has some specific expertise in the healthcare financial markets, I believe.

What happens in other markets may or may not be what Buffett seems to indicate, but Buffets statement sounds reasonable.

Allan, I was trained insurance from a friend of Buffet’s, another billionaire named Ron Jensen also from Omaha. Jensen said, “I’m richer than everybody because I’m older than everybody.”

Jensen also said about self funded plans, “That’s not insurance. These insurance companies get paid for processing claims. Their goal is to create claims to make money. We do insurance which is a different deal.”

The self funded plan I managed paid the admin fees per capita. I think nowadays, a large majority of self-funded plans pay their admin fees per capita. Jensen’s comment ilooks out of date.

Also, from the plan members’ standpoint, they certainly are insured – by their employer, not by some insurance company. Employees of large companies are as comfortable with that as they are with their salaries which, after all, are not insured by an insurance company. Employees of small companies may not feel as comfortable.

When I was still working, my employer paid its ASO insurer, Highmark Blue Cross, $20 PMPM for its active workforce and $40 PMPM for its retirees. The number of claims was irrelevant to and independent of that payment rate. It was also a highly profitable business for the insurer with margins in the 15%-20% range but the revenue base was, of course, far smaller than full risk revenue would have been.

Even if float accounted for 10% of profits as in your example, the more important issue to customers is the impact on premiums. If the float were zero, then premiums would have to be 0.5% higher holding medical claims constant. Big deal.

Health insurance is a business where float is a tiny factor because claims are paid out relatively quickly. In addition, when medical claims increase beyond what insurers priced for, float can be negative (underwriting loss) for several years in a row.

For the last few years, our receivable days averaged 32 days. Also, the checks were automatically deposited in the bank with an explanation sent by EMAIL to the Business manager. With electronic processing of claims, the charges were processed and paid in 10-12 days by standard insurance. Medicare was usually about 21 days.

I spent some time in 2012 studying the largest claims that Medicare incurred in one state, it happened to be Indiana.

I am not an academic, so my study surely had some holes in it.

But what I found striking is that most of the large claims were expensive but NOT futile. People got expensive transplants and lived better. People got dialysis and lived at all, for much longer than without the care.

I think we have an image of doctors pushing radical surgeries for 90 year olds and family members concurring. John Graham even had the phrase….

“what the sickest patients could demand from their fellow Americans”

in his article.

Now one could argue that extending a life span by 3 or 4 years is not worth the money. I could respect that argument.

But I do not think that most expensive care is ‘futile’ as we imagine that.

Bob – When I think of futile care, regardless of age, I’m thinking mainly of vents and PEG tubes and languishing in an ICU with no reasonable prospect for recovery and minimal or no quality of life. Some of these patients have advanced Alzheimer’s or dementia. Often there is no living will, the patient can no longer communicate and the adult children just can’t let go emotionally. Many such patients probably wouldn’t even want the care if they could communicate that fact but never bothered to tell anyone what care they wanted and didn’t want before they needed it.

Kidney dialysis can be exhausting and stressful. Usually, it’s a three times per week ordeal for several hours each time hooked up to the machine. A neighbor of mine went through this recently as his kidneys were failing due to diabetes. He went to dialysis for a couple of months and just got sick and tired of it as his quality of life was already poor. He finally said enough but lived for another month since he still had some very limited kidney function before he died at age 69.

As for organ transplants, there are not enough to go around so elaborate rationing protocols have been developed to determine who gets them. As I understand it, we do about 17,000 kidney transplants per year but at any given time, there are at least 70,000 people on the waiting list many of whom ultimately die waiting. I have no idea what the maximum age is to be considered eligible these days but I would be surprised if it’s much older than 70-75. Dick Cheney got a heart transplant at 71 after 20 months on the waiting list with much of that time spent near death, according to him, with an LVAD. We only do about 6,600 liver transplants per year. Steve Jobs was in his early 50’s when he got his and Mickey Mantle was in his early 60’s.

The good news is that a much higher percentage of the elderly are executing advance directives and living wills as compared to 15 or 20 years ago. Here in NJ, the protocol is to do whatever the family wants in an end of life situation. Executing a living will or advance directive and a healthcare POA and letting family members know where the documents are located is a wonderful gift to them because it relieves them of the uncertainty related to having to guess what you would have wanted. They won’t have to guess because you told them in advance. If you want everything possible done to keep you alive as long as possible regardless of cost, it’s still your right to choose that course.

Barry, even with a living will we may not know what the patient wants. How many people die as atheists, but before they die they pray to God. I have had patients advocate treatment against the guidelines of their living wills.

There is no disagreement there. It is just important to know that a living will doesn’t actually tell us what the person wants at that time. That is why living wills can change as people get older and closer to death.

My understanding is that we provide more dialysis to elderly people than our western friends. That boosts our costs tremendously. We might also use more expensive methodologies.

People make all sorts of claims regarding benefits to suit what they wish to prove. That plus the fact that there are different modalities of dialysis makes it difficult to demonstrate cross national results.

Its just to late in the week to think about solving our nations health care problems.
Maybe we should just let chuck Norris handle the 5%.
Better yet he could just handle the politicians that got us where we are today.https://www.youtube.com/watch?v=LdVBkn6ohH8